Developers struggle to meet demand for storage space for e-commerce
WANDER THROUGH central and east London, and you find traces of the East India Company. Over its 274-year history, the rapacious colonial-era trader demolished poor homes, replacing them with vast depots to store tea, silk, spices and other exotic goods. Today, these same sites are occupied by offices, restaurants and apartments. Soon they could be filled with goods again. A large lot near the historic East Indian docks, which once processed goods from India and China, is being converted into a mix of apartments and warehouse space called Orchard Wharf.
The pandemic boom in e-commerce has fueled demand for warehouses. In 2020, European companies rented 16% more new logistics spaces than the previous year, according to JLL, a real estate consulting firm. In America and Asia, the increase was 21% and 32% respectively (see graph). Some businesses, like supermarkets or medical supply manufacturers, needed more storage to meet offline demand. But one in four new leases signed last year in Western countries were linked to online shopping, estimates JLL, compared to 12% in 2019. In China, it was one in three.
CBRE, a real estate company, estimates that a 5% increase in retail inventory in America requires up to 46 square meters of additional warehouse space, enough to cover about three-quarters of Manhattan. And those stocks are growing rapidly as retailers go digital. E-commerce typically needs three times as much space as the physical type, as people expect a greater variety of products. Vacancy rates have therefore fallen from 10% in America and Europe ten years ago to only 5% now. In some places, like Toronto and Tokyo, they are less than 2%.
The value of existing assets increases accordingly. The gross assets of Prologis, a leading warehouse developer, are worth $ 10 billion more than six months ago. This in turn attracts more investment. JLL calculates that logistics asset purchases fell from one tenth of global real estate investments in 2015 to one fifth last year. In 2020, Amazon increased the area of its distribution and logistics network by an unprecedented 50%.
This building frenzy is now starting to face obstacles. The first is the scarcity of space, especially in densely populated cities. Half of San Francisco’s industrial land was converted to residential and office space between 1990 and 2008. Between 2006 and 2015, London lost 11% of its industrial land. The problem has become so acute in parts of Germany that delivery trucks operate from sites across the border in Poland and France. High costs, restrictive zoning rules, and current tenants make it difficult to convert existing properties, like struggling malls, into distribution centers. Prologis predicts that retail conversions will only represent 0.75% of global logistics stock over the next decade.
Public hostility to new sites is also increasing. Large warehouses are noisy and operate 24 hours a day. Suburban homeowners in America and Europe are worried about pollution from trucks. Even where developers promise thousands of jobs, politicians complain that these will be low-skilled or will soon be replaced by robots. Five curators MPSome have called on the British government, led by their own party, to prevent the construction of a huge warehouse in the south-east of England.
Warehouse owners are more and more creative. SEGRO, a great Briton, is redeveloping an unused space under a Parisian station. Amazon is turning old American golf courses into distribution centers. The online giant is also converting an empty parking lot in central London into a delivery hub. Hybrid developments like Orchard Wharf are proliferating.
Less creative, developers increase rents. Prologis expects them to grow 6% globally this year. This can dismay e-merchants. Not investors, however: Prologis share prices and SEGRO have almost doubled since the start of 2019. ■
This article appeared in the Business section of the print edition under the title “Safe as warehouse”